This article experimentally examines voluntary contributions when group members’ marginal returns to the public good vary. The experiment implements two marginal return types, low and high, and uses the information that members have about the heterogeneity to identify the applied contribution norm. We find that norms vary with the information environment. If agents are aware of the heterogeneity, contributions increase in general. However, high types contribute more than low types when contributions can be linked to the type of the donor but contribute less otherwise. Low types, on the other hand, contributes more than high types when group members are aware of the heterogeneity but contributions cannot be linked to types. Our results underline the importance of the information structure when persons with different abilities contribute to a joint project, as in the context of teamwork or charitable giving.

We test implications of a simple equilibrium model of informality using a survey of 48,000+ small firms in Brazil. In the model, agent’s ability to manage production differ and informal firms face a higher cost of capital and limitation on size, although these informal firms avoid tax payments. As a result, informal firms are managed by less able entrepreneurs, are smaller, and employ a lower capital-labor ratio. The model predicts that the interaction of an index of observable inputs to entrepreneurial ability and formality is positively correlated with firm size, which we verify in the data. Using the model, we estimate that informal firms in our dataset faced at least 1.3 times the cost of capital of formal firms.

Keywords:

Informal Sector, Tax Avoidance, Brazil

JEL:

H2

Automatic Stabilizers and the Size of Government: Correcting a Common Misunderstanding

The size of government is a commonly used variable in many analytical studies on the effects of fiscal policy. An accepted practice is to measure it as the ratio of government spending to GDP. However, this is not the correct metric when computing the stabilization effects of nondiscretionary fiscal policy. Intuitively, public spending does not react to cyclical conditions as much as taxes do – as reflected in the standard zero-one elasticity assumptions for spending and revenue, respectively. This paper shows that the revenue to GDP ratio is the appropriate indicator of government size for the purpose of assessing the stabilization effects of nondiscretionary fiscal policy.

Within the context of the Global Crisis, this paper examines the ongoing policy challenges in establishing a European framework for financial regulation and supervision. We do so taking into account the evidence provided during the crisis of pervasive spillover effects and cross-country interdependence. The paper applies game-theoretic models as tools to think about the cross-country aspects of European financial integration over time. Specifically, the paper applies the economic theory of alliances of Olson and Zechauser (1966) and the private provision of public goods of Bergstrom, Blume and Varian (1986). We contrast the non-cooperative Nash equilibrium allocation with cooperative (Coase) outcomes. The latter can be expected to obtain under zero transaction costs. We follow Coase in taking zero transaction costs as a benchmark to examine the factors that may favor (or hinder) cooperation in specific circumstances. We c onsider the importance of iterated interactions through the theory of repeated games, case studies, and experimental evidence to identify factors favoring or hindering successful cooperation. The total number of participants, time, foresight, multiple equilibria, leadership, the magnitude and volatility of gains and losses, imperfect and asymmetric information, decision and bargaining costs, monitoring, and enforcement are all important factors. In the paper we stress the importance of an institutional approach that minimizes obstacles to reaching cooperative outcomes. We highlight the need for effective procedures to deal with systemic risk, an agreed set of rules underpinning the single European financial market (e.g. state aid rules and a single rule book), and effective restructuring, resolution and crisis management mechanisms.

This paper analyzes the main design issues for utilizing capital transfers with an equalization objective within a system of sub-national finance. Although there is a vast literature and ample policy practice with the design of equalization grants involving needs for recurrent expenditures and/or fiscal capacity associated with current revenues, there is a dearth at the theoretical design and actual practice levels for how to use capital transfers with an interregional equalization objective. This is an area of fiscal federalism that has not been studied in depth. The aims of this paper are to identify the singular characteristics of capital expenditures and capital financing sources which allow us to quantify both needs and capacity to finance capital infrastructure and incorporate them in a capital equalization transfer formula. The theoretical design is applied to the Spanish regional level of government to reveal its advantages and shortcomings.

Keywords:

capital transfers, equalization, fiscal decentralization design

The growth of public health expenditures in OECD countries: do government ideology and electoral motives matter?

This paper empirically evaluates whether government ideology and electoral motives influenced the growth of public health expenditures in 18 OECD countries over the 1971-2004 period. The results suggest that incumbents behaved opportunistically and increased the growth of public health expenditures in election years. Government ideology did not have an influence. These findings indicate (1) the importance of public health in policy debates before elections and (2) the political pressure towards re-organizing public health policy platforms especially in times of demographic change.

In this paper, we analyze the dynamics of a very small economy which tries to attract foreign investments. For that purpose, we model the intertemporal behavior of a small jurisdiction using taxes and attractive public infrastructures as policy instruments, for given policy choices of the rest of the world. Applying Pontryagin’s maximum principle, we then characterize the potential steady states which are attainable. These results give some insights into the policy behavior that may guarantee the long run survival of very small economies.

The unusual mixed public-private structure of the urban bus market in the metropolitan area of Barcelona provides an interesting context in which to analyze the management challenges and opportunities of the partial privatization of public services. Initiatives used by the public regulator to promote competition for contracts, such as short term concessions to private contractors and the removal of entry barriers, have considerable potential for improving efficiency and quality. The growth in the share of routes managed by private firms in recent years shows that privatization is a credible threat that may well stimulate improved performance among public managers. The type of reform implemented in Barcelona is of interest to all metropolitan areas large enough to operate under constant returns to scale regimes, and suitable for potential concessions of routes in segregated areas inside the metropolitan area, so as not to miss out on the benefits of economies of density.

The primary objective of this paper is to find whether or not the governance and institutions matter for enhancing Asia’s trade. In this study, we have performed a comprehensive empirical analysis of the linkages between governance and trade at the Asian subregional level. Our results indicate that all individual governance indicators except regulatory quality have significant impact on trade in Asia, of which government effectiveness is the most crucial for Asia’s trade promotion. One of the conclusions of this paper is that soft infrastructure such as the institutions and governance are important for enhancing Asia’s trade. In other words, good governance and institutions help unlock trade potential of a region (or a nation). Improved governance, particularly at the sectoral level, can carry huge payoffs at a time when Asia is planning to pursue a free trade for the entire region. Ignoring “governance weaknesses ” can stultify economic returns to free trade. Therefore, more effective policy approaches toward improved governance are needed to complement the regional trade policy in Asia and beyond.

Keywords:

governance, institutions, trade, Asia

JEL:

F10

The political economy of infrastructure : the Spanish “parliamentary roads” (1880-1914)

This paper examines the extent to which the public allocation of road investment was influenced by political and electoral goals during the Spanish Restoration (1874-­‐1923). More precisely, we seek to identify those provinces that were favoured with higher road construction expenditure and whether tactical strategies adopted by the political parties varied over time to reflect increasing political competition. In so doing, this paper combines concepts from three strands of literature: legislative pork-­‐barrel; clientelism and machine politics; and electoral competition. Our main empirical finding for a panel of Spanish provinces between 1880 and 1914 suggests that constituencies electing a higher proportion of deputies from minority or opposition parties were initially punished through lower levels of road investment but that, by the end of the period, they were instead favoured with more resources than the rest. In addition, we also observe that senior deputies who had been ministers in previous administrations were more capable than other politicians of attracting resources to their constituencies.

We consider a framework of contractual interactions between urban transport authorities and transport operators. We estimate simultaneously the choice of contract by the authorities and the effect of regulation on the cost reducing activity of the operators. We test whether regulatory schemes currently implemented in the industry are the observable items of a more general menu of second best contracts. We suggest that the generation process of the data we have in hand is better explained by the political aspects of regulation. Moreover, the cost reducing effort of the operators is greater under fixed-price regimes, compared to the cost-plus case.

The role of public–private partnerships in promoting smallholder access to livestock markets in developing countries

Rising demands for quality and safety measures in high-value agriculture and livestock markets have necessitated the creation of increasingly complex supply chains to manage the flow of goods and information among channel actors. Public–private partnerships (PPPs) can play a key role in strengthening links within the supply chain, particularly where market failures impede access by the poor. This paper examines the potential of PPPs in promoting smallholder access to such supply chains. A conceptual model is presented that highlights the need to generate chain-level benefits for all channel participants in order for PPPs to be sustainable and to adequately address market failures. A case of both a successful and a failed PPP in livestock markets illustrates the utility of this model.

Greenhouse gas abatement is a public good, so climate policy is a public-goods game and suffers from the free-rider incentives that make the outcome of such games notoriously uncooperative. Adopting an international agreement can change the nature of the game, reducing or exacerbating the uncooperative tendencies of the players. We analyze alternative international agreements as variations of the public-goods game, and examine the incentives for cooperation under each alternative. The addition of cap-and-trade rules to the basic public-goods game is found to polarize the free-rider incentives of that game, encouraging those who would abate the most to target even higher abatement levels and those who would abate the least to target lower, and even negative, abatement levels. Such polarization between developed and developing countries is familiar from both the Kyoto and Copenhagen climate summits. Since cap-and-trade rule s decrease cooperation by developing countries, developed countries are led to reject the game’s outcome and in the process prevent agreement on a set of quantity targets. To break this deadlock and shift the equilibrium toward cooperation, a modification of the public-goods game based on price rather than quantities is needed. This involves a global price target and equity transfers via a Green Fund that rewards adoption of and compliance with such a target. The Nash equilibrium of one such game is analyzed for a group of three countries similar to the United States, China and India.